The Outlook for China’s Textile Industry

Saturday, March 21, 2009

Note: I published this on our news service back in 2006, but I think the analysis and forecast still hold up. To access the actual statistical forecasts and market projections, go to Globecot News Network.

With the recent signing of the U.S.-China bilateral textile quota agreement, many market observers are now hard-pressed in trying to understand the implications of that agreement on the U.S. market, as well as its impact on Chinese manufacturers and exporters.

At the same time, broader economic trends affecting China’s textile industry continue to outweigh quota considerations.

This analysis – though certainly not exhaustive – attempts to outline those factors affecting the Chinese industry and the implications of the Chinese industry in the future.

Current Status

The current status of China’s textile industry may be summed up in one word: growth. In turn, the future prospects for China’s textile industry may be summed up in two words: more growth.

However, even with current and projected growth in China’s textile exhibiting strong growth in recent years, has been plagued by a series of problems ranging from (at times) chronic overcapacity, inefficiencies brought about by central government planning and difficulties in securing consistent supplies of raw materials. These problems still affect the industry today.

In many ways, the emergence of China as a dominant global player in textiles and apparel up until now has mostly been the direct result of China’s success in the cut and sew trade, not really as a result of its textile industry. It is the growth in China’s cut and sew business that has in large part pulled China’s textile industry along.

In order to fuel China’s rapidly expanding global reach in apparel, the country’s apparel industry imports whatever it needs that it cannot find produced domestically. Thus, China remains a major importer of yarns and fabrics; in particular, China imports much of its basic textiles from other Asian suppliers. Yet this import phenomenon will not last for much longer as the country will increasingly rely on domestic sources for its textile supply – a supply that is increasingly supported by overseas investment.

Prospects For Future Growth

Much of China’s future growth in textiles will be predicated on several key factors:

1. China’s textile industry will continue to receive outside investment.

2. China’s textile industry will continue to expand as long as there are expanding markets for Chinese apparel globally.

3. China’s textile industry will continue to expand as long as there are few trade barriers erected by importing countries.

4. China’s textile industry will continue to expand as long as there is a rising standard of living at home.

5. China’s textile industry will continue to expand as long as there is political stability at home.

Of course, there will undoubtedly be unforeseen factors that will affect the Chinese industry. For example, SARS, another Asian currency crisis, political instability at home are all unknown “wild cards” that can affect China’s textile industry.

Outside Investment

Hampered by a variety of factors, China’s textile industry will need to continue its active courting of foreign investors in order to help provide not only much-needed capital, but technical expertise in order to improve the management and production efficiency of its textile infrastructure.

As is apparent in the following table, China has been very successful in attracting outside investment to fuel growth in its textile industry. Investment has taken the form of investment for new the construction of new mills (capital construction), as well as for efforts to modernize older facilities (innovation).

With regard to modernization, China remains the world’s leading importer of new textile equipment.

Expanding Global Market

An expanding global market will be critical for China’s textile industry over the next ten years. Although long-term projections prepared by Globecot Associates suggest that the rate growth of the global market will likely slow over the next 15 years, China’s textile industry will continue to expand due to a greater export market share and rising domestic consumption for textiles.

Global Textile Consumption

In terms of exports, China is forecast to drive other suppliers out of major markets such as the U.S., thus further solidifying the position of China’s textile industry as the largest in the world. For example, in the case of the U.S. market, china is forecast to more than double its share in the U.S. apparel market by 2005 and further expand its position by 2010.

However, as is illustrated in the U.S. example, the rate of China’s expansion in the U.S. market will slow as the end of the decade approaches as other new suppliers (such as Vietnam, Cambodia and others) step up their production of finished apparel products.

Trade Barriers To Chinese Exports

The Chinese government will need to carefully manage its relations with the governments of importing countries, as there will likely continue to be efforts by importing nations to find ways of disrupting Chinese exports in an effort to answer calls by industry constituencies to control rising imports. There will also be calls for investigations of China’s trading patterns as import-impacted producers in the U.S. and E.U. will alleged that China transships much of its merchandise through third countries.

At a minimum, transshipments are a serious perception problem for Chinese makers. Transshipments, real or otherwise, will also fuel government use of the WTO safeguard.

The Importance Of A Rising Standard Of Living At Home

While exports will continue to be the main engine of growth for Chinese textiles over the next ten years, it will be increasingly important for China to build a rising standard of living at home in order to boost domestic consumption of textiles. This is critical for the long-term prospects for the Chinese textile industry, as the growth in global consumption of textiles will likely slow in the coming decades.

Concurrently, much of China’s export growth will be fueled by the displacement of other suppliers in the world market. Although China will gain market share, this will not alter the fact that growth in the major importing markets will only match population growth – a level not adequate to maintain China’s rapid growth in recent years.

Thus, when the export engine slows for Chinese manufacturers, it is possible that the domestic market would have already developed adequate buying power to help offset declines in overseas sales. Globecot forecasts suggest that future apparel purchases domestically will rise sharply, though it is uncertain if that increase will be enough to offset what may prove to be a more difficult export environment during the next decade.

Implications For Cotton Consumption

The implications for cotton consumption are that for the next few years, cotton consumption will rise rapidly, but will level off as the rate of export growth in textiles and finished apparel subsides towards the end of the decade. To some degree, increased domestic demand for textiles will help to partially offset that decline, but to what degree it will be offset is hard to predict as the buying power of large segments of the Chinese populace are hard to anticipate going forward.

Continued cotton consumption growth in the future to feed the expanding textile sector will boost domestic production and imports. The need for increasing amounts of cotton imports will be driven both by China’s limited ability to expand domestic output without having to resort to more marginal and less productive lands and by demands for cotton qualities that are not produced in sufficient supply by domestic growers.

At the same time, imports of cotton yarn will likely continue to rise rapidly as China’s raw cotton import quota fills year in and year out. There are no quantitative limits maintained by China on the importation of cotton yarn. As a result, it is likely that China will continue to import significant quantities of cotton yarn from other Asian countries, India and Pakistan, in an effort by domestic mills to counteract shortages of raw cotton in the local market and corresponding higher prices for locally-grown cotton.

The Likely Scenario

Globecot Associates projects the following scenario for Chinese textiles, which in general is typified by strong aggregate growth for the industry, but at the expense of other suppliers.

In turn, this rapid growth will begin to slow before the end of the decade as increased competition from other suppliers and slowing global consumption of textiles begin to take their toll.

At the same time, Globecot Associates forecasts an improving standard of living for many Chinese, which will translate into improving demand for textiles via rising apparel sales. In large part, increased domestic consumption of textiles will translate into the eventual demise of the industry, as the government and outside investors will increasingly look for higher valued-added products (such as cars and planes). The textile sector has historically been a stepping-stone industry for developing economies and China will not be an exception to the historical rule.

It will be increasingly important for cotton growers throughout the world to find better ways to penetrate the Chinese market. To do this, growers will need to find ways of becoming choice suppliers to China’s burgeoning textile industry.

Needless to say, there are problems in selling foreign cotton in China, not the least of which are the problems of staple length and overall quality. Education of Chinese mills will be important. Equally important will be good relations with the current government in order to keep the annual cotton import quota from being capped at too low a level.

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